Not too long ago the staff at Mortgage Blues warned about option arms. Now these home loans are beginning to worry borrowers and lenders. One real possibility is that borrowers are behind on their mortgage as they keep up with their credit card payments. Of course the opposite might be true. But as soon as credit card rates skyrocket to the maximum allowed by law the bubble might burst for these home owners.
Many option ARMs are scheduled to reset to higher payments this year and next — an estimated half trillion dollars worth during 2006 alone, according to mortgage giant Freddie Mac. Federal and state financial institution regulators, along with some prominent lenders, worry that not all borrowers now making minimum payments are aware of the size of the monthly payment increases they may soon face. Worse yet, some of these loans were made to people who were on the financial bubble to begin with: their credit was stretched to make even the minimum payments necessary to afford the house they purchased.
To assume that all borrowers currently making the minimum payment can absorb huge increases is not realistic.